Social Security, Now Less Than Ever

Does anyone have numbers on what United employees' retirement benefits would be worth if they had been in a defined contribution plan like a 401(k) all along rather than a broken defined benefit pension? That is what I'd like to know.

Alex Tabbarok takes the opposite view and holds that the moral of the increasing unviability of defined-benefit pensions is that we should eliminate our defined-benefit public sector pensions as well. Frankly, I think this is a bit silly. If one aspect of your finances is becoming riskier, that's a terrible moment to transform a different aspect of your finances into a riskier system as well. It's particularly foolish if the risks entailed are essentially the same. Under privatization, your Social Security benefits will be down at the exact same time your 401 (k) account is down, i.e., just when you need it most.

Frankly, I think Matt is being more than a little silly. Most personal account plans encourage annuitization of at least some of the assets in the plan upon retirement. (The Cato plan would require purchase of an annuity that provides a stream of checks at at least 120% of poverty. You can cash out the extra, buy a boat, send your granddaughter to college, or leave it in the market.) If the market goes down, your annuity pays the same as ever. It would be a good idea not to buy an annuity right after the market takes a dip. And, hey!, you don't have to. Matt pretends as if the market is a giant unpredictable roulette wheel that has not developed sophisticated financial instruments for managing the modest risks of investment. He also pretends that the personal account plans do not include some means-tested assistance to people whose personal retirement savings and investments leave them below a critical threshold. But they do. There is simply nothing left in his point once the actual features of the actual world relevant to the argument are fairly acknowledged.

Now what needs to be brought into the picture here is that the federal government is not like a big corporation. Governments don't go out of business. Governments don't experience unexpected new competition for their customers. Corporations can't just generate new revenues by taking a vote. And of course corporate managers are supposed to have a different attitude vis-à-vis their employees than elected representatives have vis-à-vis their constituents.

This makes no sense. Governments CONSTANTLY go out of business (while the state abides), and new governments bring new policy. See, sometimes there are differently constituted congresses with different policy preference profiles. And there are different Presidents with different policy preferences. Etc. Which is why people get so very excited about elections. And which is why there is a lot of policy volatility. I assume Matt voted for Kerry because he wanted him to implement different policies from Bush's. No?

And Matt would not be up in arms about the prospect that Social Security might fundamentally change in nature and structure if it was not the case that it could change fundamentally in nature and structure. If government, like Everest, is unmovable, then why all the high-toned rhetoric about saving the jewel in the crown of the New Deal, yadda yadda?

Matt also seems to entertain the fantasy that government can raise revenues simply by turning up the tax spigot. But government does not exist in a blissful parallel plane where economic logic does not apply. Even fairy folk respond to incentives. Surely he has heard of optimal tax policy.

Now, it is true that the government is not like a big corporation. It is less efficient, suffers from far more severe principal/agent problems, is more inclined to corruption, and is rather more like an extortion racket.